Robert Gordon of Northwestern threw down the gauntlet to which the industrial internet is poised to respond: “Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.”[1] To the extent that he is right, it is obvious that an enormous opportunity remains untapped. The internet can deliver much of all knowledge ever documented whenever and wherever it is needed. The system of universal education designed to enable social mobility and preparation for careers in our country and others is completely broken, and leaders of industry perpetually lament the irrelevance of our educational system to the development of skills needed in the workplace. Worker retraining is a political slogan more than a reality, and millions of new high-value jobs in high-demand areas such as data science go unfilled.

Michael Mandel, chief economic strategist of the Progressive Policy Institute, issued an excellent policy memo this month that contains a true breakthrough in the thinking about the industrial internet and its economic impact.[2] The breakthrough is in thinking of the industrial internet as a perpetual, patient, interactive source of on-the-job training. There is no better place to start thinking about the disruptive potential of this concept for the economy, the workplace and the educational system than with a basketball embedded with sensors by Cisco to turn it into a training tool that can measure, e.g., arc and rotation in real time:

Potentially, a networked basketball could be used to train anyone who wanted to learn the game. The networked basketball may sound like an offbeat example, but it directly addresses a key problem that domestic companies, particularly manufacturers, repeatedly complain about: The lack of enough skilled workers. The solution, of course, is more on-the-job training, but that’s expensive for companies, requiring them to pay an experienced trainer as well as the new worker. If on-the-job training could be made much cheaper and more efficient with the Internet of Everything (IoE), then it would be easier for companies to justify hiring unskilled and semi-skilled workers. The U.S. would be able to chip away at the pool of unemployed workers and raise the skill level of the workforce. More generally, the Cisco report notes that “[s]ocialization of knowledge flattens the skills curve; IoE maximizes access to human talent pools at lower cost.” This is an absolutely crucial point. One of the biggest drags on growth is the inability of much of the U.S. and global population to easily reach the skill levels needed for the increasingly sophisticated tasks of today’s economy.

In this unique capability of the industrial internet to provide on-the-job training for workers, Mandel finds the basis for a return to a high-growth economy, through the critical measure of multi-factor productivity, which has been anemic in all manufacturing areas other than computers in recent years:

Multifactor productivity, also known as ‘total productivity’ is the lesser-known cousin of labor productivity. Recall that labor productivity in a country is defined as the amount of output per hour of domestic work. Labor productivity can go up if companies provide more capital for each worker to use, in the form of faster computers, say, or better assembly machines. Alternatively, labor productivity can rise if companies outsource more tasks to other countries. Technically, that means companies increase their use of ‘intermediate inputs’.

Multifactor productivity is a more comprehensive measure. Multifactor productivity goes up if the company can boost output without changing the amount of labor, capital, and intermediate inputs. In some sense it’s a better measure of ‘true’ productivity gains. Big innovations push up multifactor productivity because they offer “something for nothing”….increases in output without having to spend or invest more.

Multifactor productivity is a measure of the magic of capitalism—the ability to raise living standards far faster than the amount of capital or the amount of education. Basically, by being smarter and more innovative, we can create something out of nothing. Increases in multifactor productivity are unambiguously positive.

The increase in multi-factor productivity associated with the interactive education of workers is precisely why Dr. Mandel views the industrial internet as a job creator in manufacturing as well as the source of a high-growth manufacturing economy:

In fact, the industrial internet has the potential for creating jobs in the U.S. and other developed countries, while raising living standards. For one, most domestic manufacturing industries have lost competitiveness precisely because they have not been able to use the Internet to raise their multifactor productivity. A factory in China or Mexico is always going to be able to employ cheaper workers, so the U.S. comparative advantage has to be the use of cutting edge technology. It’s going to be a lot easier to expand employment at a U.S. factory if it uses the Internet of Everything to produce higher-quality goods at a lower cost. As the GE report notes, ”to be consistent with a sustained rise in wages and living standards, a revival of manufacturing in an advanced economy needs to be driven by higher productivity growth.”

These insights about on-the-job training of the industrial internet can be applied to all areas of the economy, not just manufacturing. The greatest gains resulting from the industrial internet are likely in those industries which have been transformed the least. Data-intensive sectors such as entertainment, communications and financial markets have seen the most internet-based change — i.e., the transformation of professionals and workers into internet-connected knowledge workers — with much less change in the core operations and processes of construction and utilities as well as manufacturing. The health care sector has arguably been the most resistant to structural change even from the industrial revolution, and may offer the greatest opportunities of all (including the transformation not only of professionals and workers but of patients).

One of the most interesting aspects of the value of on-the-job training by intelligent, interactive networks of machines across sectors and levels of job complexity – from supercomputers to electron microscopes to lathes – is its impact in turning all workers, professionals and executives into knowledge workers, with significant potential impacts on income inequality and social class to be explored briefly in the next installment.